Google and Other People's Content
The eternal story line in media is "Google (GOOG ) is moving into [fill in the blank]." In recent weeks, Google announced its Android operating system for mobile phones and its OpenSocial standard, which will link applications across major social-networking sites, so long as (for now, at least) they're not named Facebook. As several blogs discovered, in November the company filed a patent application for a Google magazine of sorts, which would allow users to collate Web content around which Google would wrap targeted ads. It's also launching a job ads initiative.
All of which multiplies the number of arenas into which Google can sell advertising, which provides 99% of its revenue. The formula is familiar: Sell ads, in many cases around content Google doesn't own; turn over the bulk of that revenue to the owner of the content; repeat until the end of time.
Google's revenues almost tripled, to $11.8 billion, in the first nine months of '07, so it's hard to argue with its approach. But, really, how long can this go on? Not even the most ardent Google apologist claims its profits will balloon by the billion forever. Some perched in lofty places throughout the media biosphere advance a quietly radical notion: Google will start buying content companies. In fact, they say, Google will have no choice.
This doesn't happen today or tomorrow but somewhere down the road, as the torrid growth tails off. The reason is AdSense, Google's business that runs ads around others' content and pays the owners the bulk of related revenues. (For the first three quarters of 2007, AdSense accounted for 35% of Google's gross revenues.) This business is less profitable than AdWords, which runs targeted ads around Google's search results. And there are indicators that gap will widen. The costs for eyeballs will only go up as the other big online ad network competitors—Microsoft (MSFT ), Yahoo! (YHOO ), and AOL (TWX )—all tussle to lock up sites that generate lots of quality traffic, of which there are a limited number. (For an online ad network, more traffic equals more data equals better targeting equals more money. Microsoft's $240 million bought only 1.6% of Facebook, but it kept that traffic from Google.) Google's traffic acquisition costs—which include fees paid to content players—come to almost 84% of its AdSense revenues in the third quarter.
Owning some high-traffic sites, however, does away with revenue splits and immediately boosts profit.
Remember that "content" doesn't have to mean "television network." "Content" can simply be "information you sell ads around." It would be insane for Google to buy New York Times Co. (NYT )—a cost-intensive entity operating in a severely stressed sector. It may not be insane for Google to load up on properties like Landmark Communications' Weather Channel—or, better, the competing Web site Weather Underground, which would be cheaper. That's info everyone wants, and creating it doesn't require an army of reporters and producers.
This idea, of course, runs wholly counter to Google's reigning ethos. Its stated goal is to organize the world's information, not buy it. Google-ites will tell you the culture is allergic to owning content. And companies begun, and defined, by programmers have struggled to navigate the byways of media, as many failed initiatives from AOL and Microsoft attest. (Don't recall Microsoft's Sidewalk online city guides? You're not alone.) Google intimates also say that the company's we'll-partner-with-everyone approach would be hurt by owning content, given the incentives to favor what one owns.
But Google already owns sites traditional media outlets view as rivals, like Google News and YouTube (GOOG ), and few partners have fled. As long as Google's ad network delivers the goods, traditional players won't opt out. (Giving up a few million dollars a year from Google is not an option these days.) Google's defenders say it's more likely to invent new lines of business, as it's trying to do with Android and OpenSocial, among others, to stoke growth. But as generations of past companies have discovered, there comes a time when it's easier to buy a way out of a bind than to invent one. For Jon Fine's blog on media and advertising, go to www.businessweek.com/innovate/FineOnMedia
By Jon Fine
Edited by Maurer & Cristina Linb